At a time when the procedures for the tax reform in Cyprus are underway, the legislative technical review of the bills is underway, the consultations of the stakeholders with the Minister of Finance and the Commissioner of Taxation continue, a study by the Parliament, which includes data from 22 countries of the European Union, shows that in Cyprus we have the highest tax-free income. At the same time, it is found that the level of taxation of the incomes of the middle and upper income strata is low.
As is well known, in Cyprus annual incomes up to €19,500 are not taxed while there are four tax scales for incomes over €19,501, which are subject to tax from 20% to 35%.
The Cypriot tax system today is much more simplified than the one promoted in the tax transformation, which, according to government planning, is intended to be implemented on January 1, 2026. According to the findings of the study by the services of the Cypriot Parliament, in addition to the low level of income taxation, the tax system of our country is characterized by limited progressivity, an incomplete mechanism of universal family tax exemptions and little differentiation based on social or demographic criteria.
At the same time, he underlines that, despite the advantages of the simplicity of the tax system and attractiveness for tax residents and investors, the existing framework shows deficits in social targeting and redistributive functioning.
The study of the Research and Studies Sector of the Research, Studies and Publications Service of the Parliament was carried out following the instructions of AKEL MP Giorgos Loukaidis, who asked for information on the income tax systems of natural persons in the EU, their general characteristics, the amount of the tax-free allowance, the tax rates and the amounts that are exempt from tax.
What applies today
The current income tax system in Cyprus provides for the following:
– Annual incomes up to €19,500 are tax-free. From €19.501 to €28 thousand. are taxed at 20%, from €28,001 to €36,300 The tax rate is increased to 25%, for incomes from €36,301 to €60,000. The tax is 30% and from €60,000 and above are taxed at a rate of 35%.
– Granting of 100% tax exemptions from income from interest, dividends, profits from the disposal of securities, remuneration from the provision of salaried services to persons with a permanent establishment outside the Republic or to an employer abroad for a total period of more than 90 days within a tax year, rent from a listed building, capital payments from life insurance or provident funds, widow's pension of up to €19,500, earnings from permanent settlement abroad, memberships in guilds and professional associations.
– Donations to approved charities are also 100% exempt from the tax for losses of the current year and the previous five years, only with audited financial statements.
– 20% exemption of remuneration or €8,500 from the employment of a person in the Republic of Cyprus from 1/1/2012 to 25/07/2022, 50% exemption from the employment of a person in Cyprus from 1/1/2012 to 25/7/2023. At the same levels will be the exemption for remuneration from employment of a person in Cyprus from January 1, 2022 who has not been a resident for 15 consecutive years in the Republic. The exemption is valid for 17 years from the year of his first employment and concerns remuneration in excess of €55,000.
– Deductible tax expenses are limited to 1/5 of the taxable income before the deduction of expenses related to annual life insurance premiums, contributions to Social Insurance, welfare and health funds as well as contributions to the GHS.
– 50% of the taxable income is deducted from tax, with a maximum annual deduction of €150,000. Expenses for the purchase of shares in an innovative small or medium-sized enterprise as well as expenses for retained income.
What changes with the tax reform
It is noted that with the promoted tax reform, the tax-free rate rises to €20,500 and will increase depending on the composition of the family and incomes.
A differentiation of the tax scales and the transfer of the maximum tax rate of 35% to taxable income greater than €80,000 is also provided. At the same time, depending on the income of the household, tax deductions will also be granted, with an income criterion of total gross income of the household with two working cohabitants or spouses up to €80,000, €1000 for each child, €1000 for each student, €1500 for performing mortgage instalments and €1000 for a green upgrade of a primary residence.
The findings of the study
The findings of the study show that each country applies different tax systems, in relation to structure, progressivity, ceilings, tax-free allowance as well as the incentives granted.
EU Member States apply two tax models of systems, namely progressive and complex. In particular, France, Denmark, Germany and Sweden emphasize the social redistribution of income and the strengthening of tax justice.
Most European countries follow this tax model, where the tax burden increases according to the amount of income. On the other hand, Bulgaria, Estonia, Hungary and Romania apply simplified tax systems, with a single tax rate for the purposes of tax neutrality, simplicity and to enhance the attractiveness of investments.
A taxable and incentive
It is worth noting that all Member States have tax-free income, in the context of social targeting and to support low and middle incomes. From the data, it appears that the tax-free amount ranges between €9,000 up to €19,500. The specific data concern simplified systems and direct tax-free income. For example, in Austria the tax-free amount is €12,816, in Belgium €10,910 and in Lithuania €8,964, compared to a tax-free amount of €19,500 in Cyprus.
There are also countries that apply more complex tax systems, which tax according to the composition of the family, while granting additional tax exemptions and deductions. In France, the "quotient familial" system is applied, where the tax burden is adjusted according to the composition of the household.
Other countries, such as Croatia and Hungary, implement targeted tax relief measures, such as full exemption for young people up to 25 years old. At the same time, Greece, the Czech Republic and Slovenia grant additional discounts for people with disabilities or large families. Luxembourg applies special schemes for foreign workers or returnees which include tax exemptions for relocation costs and other benefits.
In Hungary, there is a lifetime income tax exemption for mothers with four or more children, as well as for mothers under the age of 30.
Tax deductions for intolerance and allergy
All Member States grant tax deductions for business expenses, mortgage interest, donations and contributions to pension schemes. At the same time, many countries implement targeted tax credits related to support working parents, professional expenses (e.g. teleworking) or childcare, as in France, the Netherlands and Spain. In the Netherlands, even food preferences enjoy tax privileges and discounts are provided depending on the type of diet.
10% in Romania, 59.3% in Finland
There are large differences between states in relation to tax rates. This year, the highest nominal personal income tax rates are recorded in Finland (59.3%), Austria (55%), Sweden (52.4%) and France (49%, including the special contribution on high incomes). The lowest rates are recorded in Bulgaria and Romania (10%) and Hungary (15%).
Differences are identified between countries in relation to the taxation of capital income (interest, dividends, capital gains). In some countries, low, autonomous rates apply, for example 7% in Slovakia and 15% in Hungary. In Spain and Austria the rates exceed 27%.
Wealth inequality in the EU is a concern
The increase in wealth inequalities is leading many countries and international institutions to consider new forms of wealth taxation, through a net wealth tax, i.e. on the total assets of a natural person or household after the deduction of their liabilities or with special taxes on real estate or luxury goods (Belgium, France) and transfer taxes (inheritances, donations). The EU has a high wealth inequality in relation to income, with the wealthiest 1% owning 24.6% of net wealth, which intensifies the pressure for more progressive tax reforms.
